contemplating the intersection of work, the global economy, and Christian mission

Nov 23, 2007

Economic Fallacies: "Linear Projection"

The Linear Projection Fallacy projects present circumstances and trends endlessly into the future without allowing for innovation and societal change.

There are about 300 million people in the USA today. Of that total about 13% (39 million) would say they were Black and another 13% would say they are Hispanic. Let’s say that by this century’s end we expect to have a population of 450 million people, a 50% increase. Therefore, we should expect to find 58.5 million (50% increase) Blacks and 58.5 million Hispanics in the USA in 2100. Right? Wrong.

This projection looks at a static cross-section of the population at a point in time, presumes the distribution percentages of the cross-section to be constant, and then projects that reality indefinitely into the future using a dynamic variable. But we know that fertility rate differs among Whites, Blacks, and Hispanics. Immigration patterns differ as well. Might fertility rates change for one or more groups in coming years? These are just some of the variables in play. Few things in societies or economies stay constant and the Linear Projection fallacy errs in seeing present realities in static terms, rather than dynamic interrelated terms. It then projects these static realities into the future.

Let’s roll back the clock to 1900 in the United States. Urbanization is well underway. The primary means of transportation is the horse (except for long distance trips using trains.) Already city streets are filled with horse manure. The smell is pungent. The animal waste and the animals themselves are breeding grounds for disease. Horses consume a grain that could be used for human consumption. Then we learn that the population is expected to quadruple within 100 years (as it actually did.) That means four times as many horses and all the problems that go with them. Cities will be overrun by these issues and American society will collapse. This is a perfectly legitimate projection of present realities into the future. But is that indeed what happened? No.

Some folks in the late 19th Century had already begun experimenting mechanical devices. They took two bicycle frames and welded a platform between them to create a four wheeled wagon. They placed a motor on the platform to power the wheels and they added a steering mechanism. By 1910 this contraption known as the automobile was in mass production. Shortly thereafter the horse disappeared as a significant feature of American life. People opted for a new mode of transportation that had many significant advantages over horses with few of the negative side effects. Cars went on to create their own side effects but they were still far superior to the horse. Entrepreneurs tuned into the needs of society and through market inspired innovation brought solutions into the marketplace. People exercising their economic freedom choose more suitable options.

This story can be repeated over, and over, and over, with regard to societal and economic changes. So can the tales of those who have bought into the Linear Projection fallacy. Thomas Malthus, an 18th and 19th Century Anglican minister and the father of demography, has to be the patron saint of the Linear Projection fallacy. Malthus studied vital records in the parishes where he served as he reflected on patterns he saw in human societies. At the center of Malthus’ conclusions was the observation that population will always grow geometrically (i.e., 2, 4, 8, 16, 32…) while resources will only grow arithmetically (i.e., 1, 2, 3, 4, 5…). Therefore, at some point the population will always grow beyond the ability of the natural resources to support it. Plague, famine, wars, sexual abstinence, as well as murder, abortion, and contraception, would inevitably check human growth. Malthus understood this to be an unalterable pattern of human existence.

What Malthus could not see was the impact of economic freedom, the specialization of labor, the expansion of trade, and especially the astronomical explosion in productivity brought by industrialization. The 200+ year long Demographic Transition began in the eighteenth century just prior to Malthus’ birth and reshaped the whole picture.

Rising prosperity and improvement in a number of quality of life variables led to declining death rates while birth rates remained at their same high level. People were living longer and more people lived into adulthood having children of their own. Eventually birth rates began to decline as well but they always lagged behind the decline in death rates. This led to a gradual, but substantial, growth in population. Malthus’ population checks were expected to kick in at anytime. But due to science and industrial technology applied to food production, as well as expanding economic freedom, the supply needed to sustain society always multiplied ahead of the population. Malthus arithmetic constraints had been lifted. By the mid-twentieth century the death and birth rates stabilized at about replacement levels. The developing world has been experiencing the Demographic Transition in a much more compressed timeframe over the last half century. The twentieth century experienced a population explosion because the reduction in death rates that took the West two centuries to move through was accomplished in less than two decades in many nations around the world. Cultural changes affecting birth rates are catching up and the world wide population is expected to stabilize before the end of this century at about 9-10 billion.

Every few years a new breed of Malthusians appears on the scene. Many will remember Paul Ehrlich’s Population Bomb from the 1960s that forecasted 100s of millions of people dying of starvation before 2000. Then there was the Club of Rome’ Limits to Growth Report in the 1970s and Jimmy Carter’s 1981 Global 2000 Report declaring that economic growth could not continue indefinitely because of limited resources. They predicted we would be running out of numerous natural resources by the year 2000. We see many of these projections being resurrected again by some in the sustainable growth movement. Many are drawn to Jared Diamond’s Collapse. He attributes the collapse of civilizations to resource and environmental limitations.

Are we exhausting natural resources? No, nor will we anytime in the near future even with global economic growth. How do we know? Prices in commodities markets incorporate present and anticipated demand. They also account for existing supply as well as the cost of extracting the raw materials. If commodities are becoming scarcer relative to demand, then their price will be rising. Here is the conclusion of one study presented to the IMF in 2001:

“Using the longest dataset publicly available (The Economist’s index of industrial commodity prices), we analyze the behavior of real commodity prices over the period 1862-99, and have two main findings. First, while there has been a downward trend in real commodity prices of 1.3 percent per year over the last 140 years, little support is found for a break in the long-run trend decline in commodity prices. …” (The Long-Run Behavior of Commodity Prices: Small Trends and Big Variability by Paul Cashin and John C. McDermott, International Monetary Fund.)

Jared Diamond devotees fail to notice is that we live in a sustainable economic system right now. Past societies had no effective feedback loop about resource depletion like we do with markets. There is no impending exhaustion of natural resources. As resources become relatively scarcer, the price will rise. People will begin to find ways to use less of the commodity, to recycle, or to find more plentiful substitutes (renewable resources being the most desirable.) Markets are a virtual eco-system that directs us toward sustainable growth. Present global economic growth is easily sustainable for populations well beyond our present worldwide levels. When resources become an issue, we have markets to signal a problem. Because of constant innovation and ever improving productivity we simply can’t project today’s usage into the future.

While there may be legitimate reasons to place limits on some technologies because of their pollution or manage the extraction of natural resources to protect habitats, this is a different question than limiting economic growth because we are exhausting the world’s resources. It is a case of projecting current behaviors and growth rates indefinitely into the future without regard for the market signals, innovation, and changing societal values. Few people would deny that renewable resources are the optimal choice but shutting down economic growth, and thereby leaving 100s of millions of people trapped in poverty because one day we might begin to run out of some resources centuries from now is over reaction.

This is not the only economic issue that suffers from the Linear Projection fallacy but it is one of the most prominent expressions of it. Thinking economically requires us to think in terms of an organic dynamic interrelated system.

Comments

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Michael, In this line of thinking, I can remember as a teenager in the 70's (oops, did I just date myself?) the fear of a new imminent Ice Age and certain destruction as well as the fear of the "population explosion". What naive navel gazing!

These "imminent disasters" tend to be the latest, greatest pretext for Socialism and government micro management by the would be Caesar State.

Apocalyptic visions are popular tools for motivating voters whether it is in the form of cultural collapse of environmental doom. I suppose that is why politician and activists keep coming back to them.